Moving Averages

Moving Average*

• It depicts the average value of the security's prices over a period of time.
• It helps in determining the underlying trend, by smoothing the fluctuation of erratic price movements.
• Its changes as security prices goes up and down.
• It is a wonderful tool to be used in market analysis.
• It can be calculated on any series & length of data/Prices.
• The longer the period,  the average will be more smoother & gentle.
• It tracks the prices momentum of the security.
• It is a lagging indicator it cannot get you to the exact bottom or exact top, it gives signal only when bottom or top has already been made.
• The length of the moving average should be in consistency or should fit into the market cycle , one wish to be followed.
• It can also be calculated & plotted on indicators as with the prices.

Steven B. Achelis  wrote in his book Technical Analysis from A to Z  "The most popular method of interpreting the moving average is to compare the relationship between the moving average of the security price , with the price of the security itself."

Entry  & Exit Signal  for trading 

• Buy Signal = When prices rises above its moving average.
• Sell Signal = When prices fall below its moving average.

Cross Overs

• Golden Cross( Buy Signal) = When short term moving average crosses from below the long term moving average.
• Dead Cross ( Sell Signal ) = When short term moving average crosses from above the long term moving average.

Types of Moving Averages

• Simple Moving Average - It gives equal weightage to prices.
• Exponential Moving Average - It gives more weightage to recent prices.
• Weighted Moving Average - It gives more weightage to recent prices.
• Triangular Moving Average - It gives more weightage to prices in the middle of the  prices over a period of time.
• Variable Moving Average - It gives weightage based on the volatility of prices.

Most Common Moving Averages

• 10 Day
• 30 Day
• 50 Day
• 100 Day
• 200 Day
• 65 Day moving Average is most Popular amongst Future Traders.

Relevance of Moving Averages in terms of Depicting Trend

• 20 DAY - It depicts Short Term Trend
• 50 DAY- It depicts Intermediate Trend
• 200 DAY - It depicts Long Term Trend

* This knowledge is extracted from several books for learning purpose., nothing herein is for commercial use.